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Monday, January 9th, 2012

Indiana’s Bridge Deal Boondoggle, Part 1: A Financial Fiasco

- Indiana gives away $1.7 billion to Kentucky -
- Indiana’s costs up by $200 million while total project costs decline by $1.5 billion -
- $432 million diverted from other projects to close funding gap recreated by Indiana’s botched negotiators -
- Tolling likely to mean Indiana pays well over half the project –
- Indiana potentially exposed to major risk by agreeing to build a tunnel in Kentucky through Louisville’s most affluent suburb that the state has no expertise to construct -

I’ve noted before how the Indiana Toll Road lease was a stroke of genius (see “Foreign Investors Hurting, Hoosier Taxpayers Smiling” and “Major Moves Is Majorly Great“) I attribute a lot of it to Gov. Mitch Daniels shrewd assessment of the competitive landscape (see “The Shrewdness of Mitch Daniels.”) As Daniels is fond of saying, “It was the best deal since Manhattan was sold for beads – only this time the natives won.”

Unfortunately, in the case of Indiana’s recent agreement with Kentucky on a pair of new bridges across the Ohio River at Louisville, this time it’s Indiana taxpayers and motorists who are back in the role of the Indians. I’m a big fan of Indiana Gov. Mitch Daniels, but this is a very bad deal for the state. In a four part series that starts today, I’ll document the reasons why, explaining how:

  • Indiana has trumpeted that the cost of the project has declined by $1.5 billion. But in fact Indiana’s share of the cost has actually gone up by nearly $200 million. Kentucky has pocketed more than 100% of the savings – a massive $1.7 billion giveaway by Indiana. (today)
  • Indiana’s botched negotiating means $432 million in state highway funds will have to be diverted from other projects around the state in order to cover a funding gap in the project. (Tuesday)
  • Tolling won’t pay for the bridges, and in any case tolling is likely just another word for “Hoosiers pay.” (Tuesday)
  • Indiana is potentially exposed to huge financial and political risk because it is agreeing to take on a $261 million “mini-Big Dig” tunnel in Louisville’s most affluent community. From an Indiana perspective this is like having the state outsource a freeway through Zionsville to Ohio. (Wednesday)
  • The are superior alternatives to the project as a whole that are cheaper too and promise major additional savings on top of the $1.5 billion Indiana and Kentucky have already found. (Thursday)

Today I’ll examine what’s clearly the most incredible piece of the puzzle – how Indiana gave so much money away to Kentucky.

As recently as one year ago in December 2010, the Ohio River Bridges Project – which consists of a new East End Bridge, a new downtown bridge, and a reconfiguration or new construction of the approaches and connecting interchanges – was projected to cost $4.1 billion according to the project financial plan. Given the high cost of the bridge, the two states started looking for ways to save money. In November 2011, INDOT announced a series of design changes that reduced the total project cost by $1.2 billion. In late December 2011, INDOT announced that further changes had raised the total savings to $1.5 billion and also announced that Indiana and Kentucky had reached a new deal on how to split the cost. This reduced the total project cost to a “mere” $2.6 billion.

But while the total project cost declined by $1.5 billion because of these changes, Indiana’s cost actually went up by almost $200 million. That’s right, while taking $1.5 billion in total cost out of the project, Indiana managed to make its share of the project actually go up in cost. Kentucky’s cost, by contrast, declined by almost $1.7 billion. Indiana gave away more than 100% of the cost savings achieved by the project design changes.

This is truly stunning. We’re talking huge money here – more than INDOT is spending on I-69 under Major Moves, the state’s flagship project.

How is this possible? It’s pretty simple. In addition to changing the project to reduce the cost, Indiana also agreed to change the way the two states split the cost of the project. Previously, it was a pretty simple cost exercise: Indiana paid 100% of everything on its side of the border, Kentucky paid for 100% of everything on its side of the border, and the two states would split 50/50 the cost of the bridges themselves. I might quibble with this. For one thing, as Kentucky is always fond of pointing out, it owns the Ohio River. I would have thought that would be a negotiating point. There are also other approaches I might prefer on efficiency grounds, but at least this makes sense and is intuitively fair. Because there were two major pieces of construction exclusively in Kentucky – the reconstruction of Spaghetti Junction and a dubious $261 million tunnel on the East End approach (more on that later) – Kentucky’s share of the cost, as it should have been under any reasonable scenario, was higher than Indiana’s – 73% vs. 27%.

In the new agreement, Indiana and Kentucky agreed to split the cost 50/50. Indiana would be responsible for the East End bridge and the approach work in both states, while Kentucky would be responsible for the downtown bridge and the approach work in both states.

Why would Indiana agree to this? I’m not sure, but I can’t think of anything it actually got in return for it. 50/50 has some intuitive appeal, but as I said before, there’s a lot of work on the Kentucky side of the river that benefits exclusively Kentucky (such as the aforementioned tunnel). It’s not clear why Indiana should pay for that. The original deal concept was basically fair. The lion’s share of the regional population, and likely of the economic benefits of the bridge, is in Kentucky. It’s hard to think of anything where the numbers suggest anything close to an equal split of the cost, except perhaps the makeup of traffic on the bridge. And when it comes to that, Indiana is already going to more than pay thanks to the toll financing (see part two).

At the end of the day, INDOT cut a simply horrible deal, giving away $1.7 billion to Kentucky (or at a minimum its $850M share) in return for nothing. If you are Evansville and wondering how the state will ever finish I-69, or Northwest Indiana wondering why the state doesn’t have the cash to replace the Cline Ave bridge, or Indianapolis wondering why the state booted an upgrade of the state’s most congested corridor out of Major Moves, or Fort Wayne wondering why so many of your important projects have gotten pushed out, I suggest looking no further than this lousy deal for answers.

I’m sure Gov. Daniels is very eager to get this project started as yet another building block in his strong legacy around transport infrastructure. But he shouldn’t be this eager. I can’t help but wonder who he had doing the negotiation on Indiana’s behalf, because he’s way too smart to have cut a deal this bad himself.

The revised cost split is the worst, though hardly the only, problem with this agreement. Tomorrow in part two I’ll examine how toll funding shifts even further financing to the Hoosier State.

Indiana’s Bridge Deal Boondoggle
Part One: A Financial Fiasco (this article)
Part Two: Hoosiers to Pay Even More With Tolling
Part Three: INDOT’s Mini-Big Dig
Part Four: A Better Way

16 Comments
Topics: Transportation
Cities: Louisville

16 Responses to “Indiana’s Bridge Deal Boondoggle, Part 1: A Financial Fiasco”

  1. Sounds like some good good-government watchdog work on the state transportation funding issue here.

    I’m looking forward to the future parts of this coverage, and I’m curious how Indiana might be dealing with the well-documented induced-traffic effect of major highway expansion projects. Is Indiana concerned about it’s carbon footprint over the next 40-50 years? If so, why spend hundreds of millions on big projects that just dig the climate hole deeper?

  2. Thanks, Kevin.

    Suffice it to say that I think there is plenty of room to further reduce the scope of this project. I do think it’s fair to say that carbon footprint isn’t a topic of high concern in either state when it comes to this project.

  3. Perhaps Indiana could file a letter with the National Register of Historic Places requesting the de-listing of the Drumanard estate so that the East End tunnel can be replaced with a standard freeway, albeit with high-quality sound barriers built up alongside it. The people who live in that area shouldn’t have to hear the traffic, after all. But a tunnel is crazy, expensive overkill.

    As for Indiana going ahead and agreeing to what seems a bad deal, I can only guess that they figured that it was the only way to get it moving forward, as Kentucky’s politics are so intransigent, either with further reducing this still-oversized project, or with funding in the traditional manner from state transportation coffers.

  4. John Morris says:

    Looks like Public Choice Theory in action with the political benefit of “just getting something done” trumping the economic costs.

    Bottom line is there really is no rational reason a politician would act differently. They get a huge upfront political benefit, while taxpayers have little reason to look into the details of the deal in the way private owners would.

  5. John Morris says:

    Of course we can add to this a totally ignorant and or biased media. I mean, most stories likely won’t get past the 50/50 = fair, headline.

  6. Would the benefits of the bridges really favor Kentucky more than Indiana? Historically it seems that big cities did just fine growing and prospering on “their own side” of the river/lake/bay. Bridges seem to be more beneficial to opening up farther away land, or to allowing those communities on the other side to grow as they were better connected to the major city.

    There’s of course a size factor here, but it seems that the beneficiaries of these bridges are Clarksville, Jeffersonville, and New Albany more so than Louisville. It’s like Covington, Newport, and Bellevue benefit more by being connected to Cincinnati than Cincinnati benefits by being connected to Covington, Newport, and Bellevue. Same for Philadelphia and Camden, Portland and Vancouver, San Francisco and Oakland, New York and New Jersey.

    I realize this is somewhat peripheral to the discussion, and that the current 50/50 funding agreement does seem less fair than the original “our side plus 50/50 bridge split”, but these bridges likely suck more people and business out of Kentucky into Indiana than they bring in, so is it really as unbalanced as you suggest?

  7. John, to me the issue isn’t 50/50. It’s that the two states agreed to one formula, then they changed to another that radically reallocated the costs.

    Newspapers aren’t lazy. But they are resource constrained and few papers these days have a dedicated transport reporter with the expertise to question what they are told by state DOT officials. That’s why almost all good transport reporting these days comes from blogs.

  8. Chris Barnett says:

    re Ohio River bridge beneficiaries:

    Cincinnati benefits significantly from its bridges because its airport is in NKY (probably the only case of a major city’s sole airport being in a different state, if you ignore the special case of KC).

    Louisville’s major corporations (UPS has a major hub at its airport; GE has a big appliance factory complex; Ford has an assembly plant) will likely benefit from the increased freight-hauling capacity of additional bridges.

    Bridge benefits do not flow exclusively to suburban commuters or their home states.

  9. Jeffrey Jakucyk,

    Not to steal my own thunder, but I have a major open question about the breakdown the economic benefits between the two states. I’ve never seen this published, though it’s possible it exists.

    Clearly, however, leaders in Kentucky see the bridges as critical to the future success of Louisville. The previous two mayors have hugely championed the project and devoted considerable personal time to it.

  10. John Morris says:

    @Urbanophile

    “Because there were two major pieces of construction exclusively in Kentucky – the reconstruction of Spaghetti Junction and a dubious $261 million tunnel on the East End approach (more on that later) – Kentucky’s share of the cost, as it should have been under any reasonable scenario, was higher than Indiana’s – 73% vs. 27%.”

    If that’s the cost beakdown, the new formula is very strange.

  11. Why does this smell a bit like the Columbia River Crossing?

  12. Bob Cook says:

    Is it just me, or is the first-term Mitch Daniels way different from second-term Mitch Daniels? Not that I’m a fan of the first-term Daniels, but it seems to me that he and his people are just not keeping much of an eye on things — and I mean that with even positives like the “found” $300 million.

  13. Jeff Cox says:

    I cannot speak to the downtown bridges or the east end tunnels, but having been involved in some of the litigation involving the east end bridge I think I can offer some insight as to what may be happening over there.

    The east end bridge is seen as the completion of an outerbelt around Louisville and is intended to open up new areas to development. The project has been discussed for years. That discussion is important but it comes with a cost. The people with property in the path of the bridge and its approaches are affected by what is called condemnation blight. Because their property is believed to be subject to condemnation for the bridge, no one will buy it or build anything on it and the value tanks.

    Indiana often tries to help these people by going to condemnation proceedings a bit early to take the now-useless property off their hands and preserve its original value; it may cost the state more money but its only fair when you’re going to forcibly take someone’s property.

    That did indeed happen with the east end bridge. At least one planned subdivision was destroyed. The developers couldn’t sell the property but had to still pay costs on it. It was the subject of litigation. In the end the state got the property.

    That happened in a number of instances with the east end bridge. Indiana now owns all this property, but that property is a boondoggle in its own right until and unless the bridge is built. It can’t give the property back.

    And while Indiana had its house in order, Kentucky did not and was struggling to pay for the bridge. Mitch is likely just trying to get the project done after already spending a lot of money on the project.

  14. I too would have held Kentucky accountable for always stating their ownership of the Ohio River. They want to own it for all of its benefits, but they don’t want to pay to maintain the infrastructure it requires (i.e. bridges).

    In the case of Louisville, Kentucky actually has a bit of leverage since it is southern Indiana that needs connectivity to the city across the river.

    In Cincinnati’s case, Ohio has all of the bargaining chips. 1) It’s Kentucky’s river, and Kentucky’s bridges. 2) The river cities in northern Kentucky don’t keep ticking without their connectivity to the economic clout on the northern side of the river.

    Indiana did truly get hosed in this deal. They should have never sacrificed all of the savings. Nor should they have agreed to build the tunnel in Louisville proper.

  15. hoosiergirl says:

    Two things-
    We must insist Daniels does his homework on the Drumanard and get it delisted, as posted previously. Big mistake otherwise.
    Second, with River Ridge Commerce Center in Jeffersonville the East End is the ticket to massive economic development.

  16. hoosiergirl, just for the record, I’m a big supporter of the East End bridge. It should have been built a long time ago.

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